Cold comfort for North Sea oil

Gordon Brown gave a slap in the face to the oil industry for the second time in two years when he made only the smallest of changes to the North Sea tax regime.

BP, Shell and other large oil firms have been in talks with the Treasury for the last half year and had anticipated a major shake-up to counter a relentless downturn in both exploration and production.

But the chancellor yesterday tinkered only with the margins of the tax system allowing new entrants to write off tax, bringing them in to line with those who have producing fields.

"To encourage new companies to enter the North Sea I will enhance the tax relief for their cost of exploration," Mr Brown told the House of Commons in his pre-budget address.

The UK Offshore Operators Association (UKOOA) made little attempt to hide its deep frustration saying the changes would do very little to improve a troubling situation.

The organisation had hoped a new chapter of understanding and co-operation had opened with the chancellor following the North Sea windfall tax of 2002.

"We are disappointed because we had been talking to the Treasury from April to October and anticipated a broader outcome that would benefit all exploration," said a UKOOA spokeswoman.

"This will have no tangible impact on exploration levels and government goals of meeting production levels of 3m barrels a day by 2010 will only be met with better collaboration," she added.

Relations between the government and the industry had improved in the spring when Mr Brown abolished petroleum revenue tax from tariff income on new infrastructure deals with effect from January 2004. UKOOA said it could unlock a further 500m-700m barrels of new oil in the North Sea, and bring forward investment of up to $4bn (£2.3bn).

Independent tax experts said the new measure should help an industry which has seen drilling levels slump to their lowest levels in 35 years with only 16 exploration holes started last year compared to 160 in 1990.

"This should have a positive impact for the significant number of new entrants and smaller start-up companies which are investing in the UK oil and gas industry and will hopefully encourage them to explore for new reserves here," said Julian Small, an oil and gas tax partner at accountants Deloitte & Touche.